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Edited Transcript of CCRN.OQ earnings conference call or presentation 4-Nov-20 10:00pm GMT

·58 min read

Q3 2020 Cross Country Healthcare Inc Earnings Call Boca Raton Nov 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Cross Country Healthcare Inc earnings conference call or presentation Wednesday, November 4, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Buffy Stultz White Cross Country Healthcare, Inc. - President of Workforce Solutions & Services * Kevin Cronin Clark Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director * Stephen Alexis Saville Cross Country Healthcare, Inc. - EVP of Operations * William J. Burns Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer ================================================================================ Conference Call Participants ================================================================================ * Albert J. William Rice Crédit Suisse AG, Research Division - Research Analyst * Brian Gil Tanquilut Jefferies LLC, Research Division - Senior Equity/Stock Analyst * Jeffrey Marc Silber BMO Capital Markets Equity Research - MD & Senior Equity Analyst * Kevin Mark Fischbeck BofA Merrill Lynch, Research Division - MD in Equity Research * Kevin Mark Steinke Barrington Research Associates, Inc., Research Division - MD * Tobey O'Brien Sommer Truist Securities, Inc., Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen, and welcome to Cross Country Healthcare's Earnings conference call for the third quarter of 2020. A replay of this call will also be available through November 19th, 2020, and can be accessed either on the company's website or by dialing 800-391-9857 for domestic calls and (402)220-3093 for international calls and entering the passcode 2020. (Operator Instructions) I will now turn the call over to Bill Burns, Cross Country Healthcare's Chief Financial Officer. Please go ahead, sir. -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [2] -------------------------------------------------------------------------------- Thank you, and good afternoon, everyone. I'm joined today by our Co-Founder and Chief Executive Officer, Kevin Clark as well as Buffy White, Group President of Workforce Solutions and Services, and Steve Saville, Executive Vice President of Operations. Today's call will include a discussion of financial results for the third quarter of 2020 and our outlook for the fourth quarter. A copy of our earnings press release is available on our website at crosscountryhealthcare.com. Before we begin, we need to remind everyone that certain statements made on this call may constitute forward-looking statements. As noted in our press release, forward-looking statements can vary materially from actual results and are subject to known and unknown risks, uncertainties and other factors, including those contained in the company's 2019 annual report on Form 10-K and quarterly reports on Form 10-Q as well as in other filings with the SEC. The company undertakes no obligation to update any of its forward-looking statements. Also, comments made during this teleconference reference non-GAAP financial measures such as adjusted EBITDA or adjusted earnings per share. Such non-GAAP financial measures are provided as additional information and should not be considered substitutes for or superior to financial measures calculated in accordance with U.S. GAAP. More information related to these non-GAAP financial measures is contained in our press release. With that, I will now turn the call over to our Co-Founder and Chief Executive Officer, Kevin Clark. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Bill, and thank you to everyone for joining us this afternoon. Our performance in the third quarter is a testament to the resiliency of our company to manage through challenging times and deliver across many fronts. Following an unprecedented fall in demand in the second quarter, we have continued to stabilize and rebuild our business, allowing us to once again exceed guidance, all while delivering on one of the most important IT projects this company has undertaken in more than 30 years. I'll go into some more details about our IT strategy in a moment, but I'm thrilled to report that this project to replace the applicant tracking system for our Travel Nurse business was completed on time and under budget. Just as important, feedback from our recruiters has been extremely positive, and thus far, we are performing in line with our expectations. In addition, we completed the actions to achieve annual savings of more than $20 million through headcount reductions and the closing of more than 30 offices. As demand rebounded late in the second quarter and has continued to remain strong throughout the third quarter, we were successful in building back a significant portion of our Nurse and Allied business, which was impacted by COVID. And though not back to pre-COVID levels, weekly headcount increased 17% for Travel Nurse and 16% for our branch business as compared to the start of the third quarter. Also contributing in the third quarter was our support of a labor disruption at one of our managed service program clients, which generated approximately $8 million in incremental revenue. Though we do not routinely staff labor disruptions, we believe it is important to support our clients when they request our help, especially in the midst of a pandemic and national clinical labor shortage. It's worth noting that even without the revenue from this project, we exceeded our expectations for the quarter, both from a revenue and adjusted EBITDA perspective. The pandemic, in many ways, has reinforced our value proposition in the market for offering a flexible, rapid and cost-effective means for delivering critical care to millions of Americans across thousands of facilities. We expect that COVID-19 will continue to have a mixed impact on our business with regional spikes in demand, especially for ICU, med-surg and telemetry nurses as well as declines in some areas due to the uncertainty from COVID, such as our Education and Search businesses. Through this pandemic, though the pandemic is far from over, and we are seeing spikes in more than 40 states, hospitals continue to strive for a return to more normalized operations. With admissions for many systems still below pre-COVID levels, our clients face intense cost pressures. And given the uncertainty surrounding the impact COVID-19 may have on their markets, they are turning to Cross Country for solutions that meet their needs. We continue to work collaboratively with clients on ensuring competitive rates and flexible assignment lengths to provide the critical resources they need. Throughout the third quarter, we have seen bill rates for the COVID assignments trend downward, though in general they remain higher than pre-COVID rates. For the third quarter, our average bill rate in Nurse and Allied segment were up more than 20% as compared to the prior year, but were down approximately 9% from the second quarter. Bill will go into more detail on pricing in just a few minutes. Revenue for our largest segment, Nurse and Allied, was down approximately 12% sequentially. Overall, volumes stabilized in the third quarter with billable hours down a modest 4%, driven by the wind down of COVID assignments from the second quarter as well as the decision by an optimal workforce solution client to bring the workers back in-house. Spend under management from our MSP clients also declined sequentially to a run rate of between $450 million and $500 million, more in line with pre-COVID levels, primarily due to the wind down from COVID surge assignments. Capture rates at MSPs remained unchanged at approximately 65%. Though in line with our expectations, our physician staffing business continued to experience an impact from COVID-19, with revenue down 19% over the prior quarter. Demand has been down across most specialties with anesthesia and hospitals being the most significant. Within physician staffing, revenue from advanced practices was actually up both sequentially and over the prior year. From a technology perspective, we continue on our path of digital innovation across our business. In today's market, speed is critical both to our health care professionals and the clients we serve. Our efforts over the last 21 months have resulted in the launch of our new applicant tracking system and our marketplace application earlier this year. I am so incredibly proud of our entire organization as everyone has worked tirelessly to deliver on this vision. And while we celebrate these major milestones, we recognize that our work is not finished. We are immediately proceeding to the next phase of our transformation, upgrading and integrating the middle and back office platforms, and bringing the company's IT infrastructure and business processes onto a single cohesive platform over the next 12 to 18 months. Once realized, we expect that these initiatives will drive growth in both revenue and profitability through better operational execution, enhanced productivity and a world-class client and candidate experience. Looking ahead, there remains a significant level of volatility in the market with unprecedented rapid swings in demand. As a result, both clients and health care professionals are seeking flexibility and requesting shorter assignments. That said, leading into the fourth quarter, I am encouraged by the backdrop in the marketplace with orders remaining strong across our travel business, and sequentially, weekly improvements in both our local and education businesses. As a result, we are projecting revenue to be between $185 million and $195 million for the fourth quarter. Excluding the impact from the labor disruption in the third quarter, this guidance reflects the likelihood of continued sequential improvement in our business. From a profitability perspective, we are guiding to an adjusted EBITDA of between $6.5 million and $8.5 million, reflecting the sequential change projected for revenue as well as investments we plan to make in additional revenue producers. While I'm encouraged by Cross Country's efforts to navigate this crisis, we are continuing to take actions to restore the company to growth and greater levels of profitability. I remain confident that we have the right team in place, that we are taking appropriate action, and that we will ultimately reach our goals. Just before I hand the call over to Bill to step through the numbers in more detail, I'd like to share with you some comments we recently received from one of our nurses working the front lines of the pandemic. She wrote, being away from my family to care for patients is a choice I made. Seeing patients in the ER away from their families, all alone and their moment of vulnerability, has been very difficult. It has also been humbling to walk alongside them. It makes you forget your own struggles and sacrifices. We go into work, coronavirus or not, pandemic or not, and we give it our all. We are there for our patients. Now this nurse exemplifies the compassion and dedication of our nurses and that of the thousands of heroes who risk their personal safety to care for COVID patients. They continue to be on the front lines every single day, many of them moving from state to state, surge to surge, without seeing their own families. From our Cross Country Healthcare family, to all of them and their families, we extend our deepest appreciation for their dedication and service. Now let me turn the call over to Bill to walk us through the results in more detail. Bill? -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [4] -------------------------------------------------------------------------------- Thanks, Kevin. Our results for the third quarter reflected solid execution as both revenue and adjusted EBITDA exceeded our guidance. Consolidated revenue was $194 million, representing a 7% decline over the prior year and a 10% sequential decline, primarily on lower volumes across the business due to the impacts from COVID-19. Turning to Nurse and Allied, revenue was $175.2 million, down 12% sequentially and 5% over the prior year. As expected, the number of COVID assignments and the respective bill rates declined for the third quarter. With the decline in COVID travel assignments, Travel Nurse was down approximately 20% sequentially. However, it was flat relative to the prior year. On a year-over-year basis, the decline in billable headcount was offset by favorable bill rates and mix. Our local branch-based business was up 14% sequentially and down just 2% relative to the prior year due primarily to the labor disruption staffed in the third quarter as well as a sequential decline -- sorry, sequentially weekly improvement throughout the quarter. As expected, education was down 30% compared to the prior year due to the virtual start of the school year in most markets. We continue to generate revenue through our teleservices model, which has allowed weekly revenue to continue to expand and recover. We're actively working with schools to assist them with reopening safely and hope to see that trend continue into the fourth quarter. At this point, though, we are unable to predict when or which of the schools we serve may reopen this school year. Bill rates for Nurse and Allied will hire across all lines of business due primarily to the impact from COVID as well as the labor disruption. Additionally, we have seen a favorable impact from mix from higher bill rate specialties and a decline in hours for Optimal Workforce Solutions, which were among the lowest bill rates for the company. We estimate that our underlying bill rates within Travel Nurse were up approximately 3% over the prior year. Looking ahead, we expect rates to continue to normalize as we move forward but remain above prior year levels for the next several quarters due primarily to the impact from COVID-19 assignments. As we've called out on several of our earnings calls, the company established pricing guidelines for COVID assignments, whereby rates are determined in consultation with clients to ensure our ability to quickly provide the critical staff needed. Always with the client's consent, these rates may flex up or down depending on conditions in the respective markets. Our physician staffing segment, which had been on a positive trajectory just prior to COVID has continued to see negative impacts from the pandemic, primarily in the physician specialties. Revenue was $16.5 million, representing a 19% decline from the prior year and 2% sequentially. Gross profit for the quarter was $48 million, representing a gross margin of 24.75%, which was 50 basis points above the high end of our guidance range. The primary driver for the stronger-than-expected margin related to the labor disruption which added an estimated 25 basis points to the overall margin. Excluding the labor disruption, margins across Nurse and Allied would still have been above the upper end of our guidance range, in part on improved bill pay spreads as well as favorable mix. Total SG&A was $40.8 million for the quarter, down 8% over the prior year and 3% sequentially. The primary drivers for the declines were reductions in headcount and the closure of offices as part of our cost savings programs. Incremental savings realized compared to the second quarter were approximately $3 million, bringing the year-to-date total realized cost savings to $7 million under our $20 million cost savings plan. SG&A for the quarter also included an incremental charge of $1.6 million related to the expected performance under the company's short-term incentive plan. While we've taken out considerable costs, it's important to note that the company has been and will continue to invest in revenue-producing capacity based on the market outlook. Below adjusted EBITDA, there are a few items to call out. We recognized restructuring costs of $2.3 million associated with severance and other exit costs. We incurred $800,000 in legal fees pertaining to an ongoing nonoperating matter. We also recognized $1 million in noncash impairment charges, primarily related to the write-off of assets associated with leases exited during the quarter. And finally, interest expense was approximately $600,000, representing a 56% decline over the prior year and an 18% decline over the prior quarter. The year-over-year decline was driven by a lower effective interest rate on the new ABL facility as well as lower average borrowings during the quarter. From a balance sheet perspective, we ended the quarter with $3.4 million in cash and $56 million in outstanding debt under our ABL, excluding letters of credit. From a cash flow perspective, we had a use of cash from operations due primarily to the timing for revenue during the quarter. Our days sales outstanding was 64 days, representing an increase of 6 days since the start of the year and 15 days over the prior quarter. Though part of the increase was anticipated following a historically low DSO in the second quarter, the increase was driven by the growth in revenue throughout the quarter as well as lower collections from several larger clients. On a year-to-date basis, we reported $25 million in cash from operations in comparison to $11 million in the prior year. Capital expenditures were $1.2 million for the quarter, bringing our year-to-date CapEx to $3.7 million. As of September 30, 2020, we had borrowings of $56 million under our credit facility, which was down approximately $15 million from the start of the year. This brings me to our outlook. As Kevin mentioned, we expect consolidated revenue to be between $185 million and $195 million, representing a 9% to 14% decline over the prior year. Sequentially, this guidance reflects the wind down of the labor disruption staffed in the third quarter as well as the anticipated impact from the holidays on the fourth quarter. As we discussed, demand remains strong, and we continue to make progress on growing our headcount on assignment across Nurse and Allied. Demand for physician staffing is expected to remain soft, and we expect the segment to be flat to down 2% sequentially. COVID remains a factor and regional spikes could continue to impact our business both positively and negatively. We are guiding to a gross margin of between 24.5% and 25%, largely consistent with the third quarter. Adjusted EBITDA is expected to be between $6.5 million and $8.5 million, reflecting the impact on gross profit from the spread in the revenue guidance. For SG&A, we are not expecting significant incremental savings as compared with the third quarter, given the majority of the cost-saving actions were completed earlier in the year. Our adjusted earnings per share is $0.06 to $0.11. Also assumed in this guidance are depreciation and amortization of $2.5 million, interest expense of $700,000, stock-based compensation expense of $1.1 million, tax expense of $200,000 and a fully diluted share count of 36.5 million shares. This concludes our prepared remarks. And at this point, I'd like to open the lines for questions. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from A.J. Rice with Crédit Suisse. -------------------------------------------------------------------------------- Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- First, if I could ask, I appreciate how nurses have stepped up and as you highlighted that in the prepared remarks. I'm just curious, now that we've been into the pandemic for a while, are you still seeing that healthy number of applicants for positions? Maybe what's the trend in your unbilled orders look like at this point? Are you having a little more trouble getting nurses to step up? Just any thoughts on that? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. A.J., great question. Look, it's a supply-constrained marketplace. And our -- from the demand perspective, our orders are up 3x more than where they were at the beginning of the quarter of Q3. So we have a lot of unfilled jobs like the rest of the industry as COVID has surged again. What we have done is dug in, we have, over the past 2 years as part of our digital transformation, spent a fair amount of time in capital, etc., to put together a digital strategy around programmatic advertising, social media and a lot of other improvements to the company. So I feel like the company is in a very good position to continue to nurture and engage and develop the community of nurses that we pull our applicants from. So it's the number one thing that we focus on is this constrained supply. But I think we're doing a very good job at it through the quarter. -------------------------------------------------------------------------------- Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Okay. I think if I'm reading or hearing Bill's comments right, so your pricing gain that you showed in the quarter, there was an underlying bill rate. I'm assuming that's ex-labor disruption, ex-COVID of plus 3%. How much did the others, the labor disruption and the COVID premium, how much did those contribute to what we saw on the pricing side, particularly with the Nurse and Allied? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. Well, as we called out, price overall is up significantly, 20% year-over-year, but it's down from the second quarter. But Bill, you might want to go into a little more detail. I mean if you, ex-COVID, bill rates are up low single digits, but Bill, you might want to provide some more color. -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [6] -------------------------------------------------------------------------------- Yes. Hi, A.J., it's Bill. So as Kevin said, we did look at the overall impact of bill rates from both COVID and from the labor disruptions. And when we took that part out of our business to look and see what our average bill rate is doing, we could clearly see rates are up about 3%. And it gets a little bit trickier to start to separate between COVID and non-COVID because clients are starting to get desperate in certain locations and geographies. And so we're seeing a little bit of a spike in crisis rates here and there. So it's not always flagged as particularly a COVID order. So it's a little bit harder to answer your question about exactly how much COVID drove. But I'd say, again, if you look at the average bill rate or the average revenue per FTE, about 3% of the increase would have been on the underlying base business and the rest was driven by the mix of the orders from the high bill rate specialties. We've seen a lot of demand particularly in ICU in several states throughout the country that have spiked as part of the second surge, and I'm sure Buffy can give you some color on that. But I think, again, we were encouraged to see that the bill rates were still trending up despite or after removing the impact that we could identify from COVID. -------------------------------------------------------------------------------- Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [7] -------------------------------------------------------------------------------- Okay. It sounded like in your remarks that maybe the COVID-related placements, and I don't know if that's easy to distinguish how much is, what are specific COVID-related placements versus non- COVID. But it sounds like that stepped down a little bit from second to third quarter. Is there any way to sort of parse out order of magnitude of how many of your assignments right now are you would attribute to the COVID crisis specifically? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [8] -------------------------------------------------------------------------------- Yes. I mean I would say, I'll let Buffy provide some additional color, but we have seen an improvement in overall med-surg and OR. We still see elective surgeries depressed. We're seeing an uneven demand. As you've probably seen on TV and so forth, COVID has spiked, especially in the Midwest and the Southwest states like Oklahoma and Nebraska and Wisconsin. But Buffy, do you want to provide a little more insight there? -------------------------------------------------------------------------------- Buffy Stultz White, Cross Country Healthcare, Inc. - President of Workforce Solutions & Services [9] -------------------------------------------------------------------------------- Certainly. I don't think that we're seeing facilities parse out their orders the way that they did during the first COVID surge arguably into kind of what I like to call 1.5 of the COVID surge. But they at this point are adjusting, you see winter orders coming in. I think they're trying to prepare to capture supply. The difference now, too, is some systems are isolating their COVID patients into specific facilities or units. That being said, you can work in any facility and be exposed to COVID. So they're not necessarily parsing them out that way. Plus, they're trying to adjust to the marketplace and raise their bill rates as required in order to capture. But now that we're seeing this duality of COVID plus winter, we are seeing crisis rates prior to them necessarily calling them COVID. So it is a little difficult to parse out. I will say that we are looking at the dynamics from what geographies we are seeing the COVID increases in and speaking with our health care facilities to understand the COVID census. And they are running in some of the same markets as they did last time, Arizona, California, Florida, Texas, as you can imagine. Now we're starting to see some other states spike, as you have seen. -------------------------------------------------------------------------------- Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [10] -------------------------------------------------------------------------------- Okay. Last question. Bill, you made some comments about the DSOs being up sequentially. And I think one of it was just the timing of revenues, but you also said something about a couple of customers that you're working with or whatever. Is there a concern that some of those might be at risk? Or is there any way to talk a little more about what you're dealing with there? -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [11] -------------------------------------------------------------------------------- Yes, sure, A.J. As I look at the DSO bridge, a big chunk of it was due to the timing of revenue and how much came in in September relative to the quarter. In particular, the labor disruption that Kevin called out, so the $8 million, represents about 4 days of the increase in DSO. The impact from schools restarting, just there's -- the billing begins, but you don't collect for some period of time, and that added about another day to the DSO. And so when you consider that we were historically low coming into Q2, a more normalized level for us is somewhere in that 56- to 58-day range. So I can ascribe probably 5 days just to those 2 items I just mentioned. And then as I look across the other increases, it's to a smaller degree the clients I was calling out. But it's more about timing. I don't have concerns. It's not an impending write-up that we're foreseeing. It's really about timing for collections with them. And it happens periodically, I will say. As we get into third and fourth quarter, we do tend to see some slowdowns, it happened last year as well. And so it's -- I don't think it is anything other than just industry normal cyclicality on the payment stream payment side. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- Our next question comes from Jeff Silber with BMO Capital Markets. -------------------------------------------------------------------------------- Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [13] -------------------------------------------------------------------------------- You talked a bit about some of the spikes you're seeing I think in the Midwest and Southwest. I'm assuming that's in terms of nursing demand. I'm just curious, are you seeing the reverse trends for physician demand in those areas? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [14] -------------------------------------------------------------------------------- Yes. Hey, Jeff, how are you? Physician demand is still soft. We've seen growth in our Cross Country locums division and our advanced practice division. So nurse practitioners and physician assistants, lots of demand. Demand is up I think 16% year-over-year for the quarter. But physician is still soft. If you recall, in our top 4 specialties are anesthesiology, emergency, primary care and hospitalists. And of those, only the emergency department physician staffing is up year-over-year. So we're seeing it's still soft. We're encouraged that we look at these hospital volumes that are now at the beginning of the quarter, they were upwards of 90% to 95% of pre-COVID levels. Now most of the reports that we're seeing and hearing from clients, it's more like 95% to 97%. So we're encouraged by what we're seeing. And I think a lot of hospitals are thinking about their enterprise. How they do kind of parse COVID patients in one part of the enterprise and still also provide elective surgery and create operating rooms. I noticed in Georgia there was an effort to try to get the state of Georgia to keep the field hospitals in place for operating rooms for surgery, while the acute care hospitals manage the patients there. So that's kind of what we're seeing on a broad base. I don't know, Steve, if you had some more color you wanted to add to that, to Jeff's question? -------------------------------------------------------------------------------- Stephen Alexis Saville, Cross Country Healthcare, Inc. - EVP of Operations [15] -------------------------------------------------------------------------------- Kevin, you've covered pretty much everything. The only thing I would add, Jeff, would be that although the hospital admissions are gaining on their pre-COVID levels, and as Kevin pointed out, it's about 95% pre-COVID, what we're not seeing is that increase being perfectly correlated with new orders. As we exited the quarter, the trend was seeing a growth in our order count, and that's continuing. But we have some significant work ahead of us to get back to pre-COVID levels. -------------------------------------------------------------------------------- Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [16] -------------------------------------------------------------------------------- Okay. That actually is a good segue to my next question. I know you're not talking beyond the current quarter, but can you give us some sort of insight into how orders are doing into early 2021? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [17] -------------------------------------------------------------------------------- In terms of the overall business or physicians, Jeff? -------------------------------------------------------------------------------- Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [18] -------------------------------------------------------------------------------- I'm actually more interested in Nurse and Allied, but if you want to comment on physician, that will be great as well. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [19] -------------------------------------------------------------------------------- Well, look, as I commented earlier, I mean, the overall number of job openings that we have for Nurse and Allied is up significantly from the beginning of the quarter to the end of the quarter. And candidly, we really just don't see any end in sight in terms of the demand diminishing. We think we're going to be operating in this type of pandemic environment well into 2021. And I think we'll see the movement of spikes and surges move from region to region. So what does that mean? It means that these hospitals most importantly need critical care nurses, ICU and telemetry and also med-surg. What it means is, as we've called out earlier, the advanced practice areas, nurse practitioners and PAs are going to be in high demand. And on the physician side, principally around emergency. So I think we're going to also be in a supply-constrained marketplace for a lot of other reasons. One, just of course, the large number of open orders, but there's just such stress and burnout and fatigue among Nursing and Allied, health and physician, all of the different specialties right now. And I think that's going to have impact. People are getting burned out. But maybe I'll also ask my team, Buffy, maybe to comment as well and tell Jeff what you're seeing as well. -------------------------------------------------------------------------------- Buffy Stultz White, Cross Country Healthcare, Inc. - President of Workforce Solutions & Services [20] -------------------------------------------------------------------------------- No, Kevin, this is Buffy. I would completely agree with that. I think that what is interesting is health care facilities are seeking longer-term assignments, even booking assignments well into Q1 so that they could make sure that they have the supply. I would agree at this point we're seeing such fatigue, we also see the impact of health care professionals having to care for their families. So that is also impacting supply. And supply right now, health care professionals need a little bit more flexibility. So we see health care facilities wanting to book longer assignments and booking into Q1. That being said, supply wants some flexibility. So we're seeing a little bit of a compression in the duration of assignments. But so that people have coverage over the seasonality and well into the holidays and winter, we are seeing the orders continue on. And I agree, no end in sight. -------------------------------------------------------------------------------- Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [21] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [22] -------------------------------------------------------------------------------- So Jeff, just let me add, too, I think there's this -- we talk about it internally as a twin-demic because the seasonal flu is here, and we are seeing and hearing about patients that come into the ER that have both COVID and normal flu. So that will probably also create an even greater spike in probably the January, February, March time frame. -------------------------------------------------------------------------------- Jeffrey Marc Silber, BMO Capital Markets Equity Research - MD & Senior Equity Analyst [23] -------------------------------------------------------------------------------- Okay. Helpful. You had talked about some of the progress on your cost management. I think you said you've realized about $7 million year-to-date. If I remember correctly, you targeted about $10 million to $12 million by the end of the year on your way to $20 million. Is that still accurate? -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [24] -------------------------------------------------------------------------------- Yes. Hi, this is Bill. Yes, that's exactly right. So with the $7 million realized to date, we have called out $10 million to $12 million to be realized. And in my prepared remarks, I mentioned there'll be no incremental savings coming in the fourth quarter, but that just meant what we got in the third quarter would be carried forward. So it's an additional $5 million recognized or realized in the fourth -- expected to be realized in the fourth quarter. And that will hit the $12 million realized this year. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- Our next question comes from Kevin Fischbeck with Bank of America. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [26] -------------------------------------------------------------------------------- Great. I just want to try to reconcile some of the comments that you're making. Originally you were talking about demand being up 3x from the beginning of the quarter to the end of the quarter. Can you also talk about orders kind of lagging the return on volume growth? Just trying to understand kind of where we actually are as far as kind of percent of demand. Is it normal right now, and whether there's something to think about as far as a hospital volume number to reach to, to get all the way back to that kind of normal demand? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [27] -------------------------------------------------------------------------------- Yes. Kevin, good question. I mean, look, we started the year and really going back to -- everything for me started in January 2019 when I rejoined the company as CEO. And throughout 2019, the demand side was improving each and every quarter. In the first part of the COVID spike, we saw our orders rise more than 20% and as the pandemic unfolded. And then as we've reported, it fell sharply by almost 80% as hospitals really experienced much, much lower census. And then orders started to rebound in June and we saw states such as California and Texas and Florida and Georgia and Tennessee seeing the biggest increases. And then through the third quarter, these Midwest states like Oklahoma and Idaho, and Nebraska, etc. And it's been unprecedented. We have more orders today at the end of the third quarter than we had when the COVID pandemic spike occurred. So we're at a very, very high level. And then looking into those orders, as we've talked about, we are seeing with volumes coming back a more broad-based demand in places like the OR or pediatrics or L&D and some of the other specialties that we cover. And we think that it's going to continue to be spiking potentially even higher as we get through this seasonal flu. So I'm not sure if I answered your question, but that's how we kind of think about demand right now, but it's at a level now higher than what we saw in the first quarter. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [28] -------------------------------------------------------------------------------- I guess why isn't that kind of converting into a higher revenue number then as we head into Q4? I mean you're talking about sequential improvement if you exclude the disruption, but it feels like you're talking about a demand number that's incredibly high, but a revenue number that feels a little bit conservative. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [29] -------------------------------------------------------------------------------- Well, we also called out that we expect as the broad market increases, bill rates to also subside somewhat. And I'll just say, from the perspective of this management team, we've met or exceeded our guidance almost on all measures for the past couple of years. So we typically tend to be careful and conservative in terms of our expectations around the business. When you get to the fourth quarter, you do have a seasonal drop off. When the holidays occur, a lot of nurses want to go home. And especially this year, we think there'll be a seasonal drop off with some of the things I mentioned earlier, burnout and fatigue. And as Buffy mentioned, I think folks wanting to be with their family, because we've got health care professionals that are working a lot more hours than they typically work. -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [30] -------------------------------------------------------------------------------- And Kevin, this is Bill. Just one quick comment on the sequential guidance, if you think about it. So last quarter, we called out that we started off with lower headcount as a result of that sharp fall in demand in the middle of the second quarter. We have been rebuilding headcount all throughout the third quarter. And as you look into the fourth quarter, implied is that we will continue to regrow headcount, but what you have to take into account from Q3 to Q4 is the impact from the labor disruption. So if you were to look at that without the $8 million on a normalized basis to the fourth quarter, we would show roughly flat to about a 5% or 6% increase in revenue sequentially. And that, again, is not the norm. As you would imagine, locums usually takes a step backwards, there's seasonality in some parts of our business. But we're still expecting that to be the trend that we are looking forward to with the growth. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [31] -------------------------------------------------------------------------------- And let me just add one other comment too that I think is interesting, is as this COVID pandemic has unfolded, we're seeing hospitals request shorter-term travel nurse assignments, for example. So typically, about 10% of our Travel Nurse business is less than 13 weeks, which is the industry standard for travel work assignments. And in this environment, we're seeing 25%. So we're seeing shorter assignments in terms of the orders that we're getting and that also makes us cautious. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [32] -------------------------------------------------------------------------------- Okay. So that demand is coming on orders and maybe the powers are not quite up as much as the orders are? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [33] -------------------------------------------------------------------------------- Well, hours, if you are looking at it from kind of -- we like to think of the typical travel nurse assignment is 13 weeks, which is a full schedule for 13 weeks and about 1/4 of those orders that we're getting for 13 weeks assignment are actually not 13 weeks, they're shorter. They're 4 weeks or 2 weeks or 6 weeks. And that's bringing down our average work assignment in this environment and that's also part of our analysis around our forecast. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [34] -------------------------------------------------------------------------------- Does that change all the economics on a per day basis for you if it's shorter or longer? Or is it the same kind of margin overall? -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [35] -------------------------------------------------------------------------------- It's not a question of margin. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [36] -------------------------------------------------------------------------------- Go ahead, Bill. -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [37] -------------------------------------------------------------------------------- Yes. No, I was going to say, it's not a question of margin on the orders. I mean that's probably holding up consistent with what we see on the 13-week orders. It's a question of having to refill that business, right? So if something was going to go 3 months and you're going to add to it and you're looking out now and the assignment could end in as short of 8 weeks or 6 weeks, as Kevin mentioned. And so it's just you've got to refill that headcount a little faster than we otherwise might have. So I guess it would be a change in the recruiter productivity in terms of like the number of headcount that they'll have to refill and staff over that quarter. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [38] -------------------------------------------------------------------------------- Okay. That makes sense. And I guess you guys have been closing physical branches. I was wondering if there's any data that you guys have right now about whether that has in any way impacted the growth at those branches versus branches that you kept your physical presence. Is there any change in growth rate between those 2 cohorts at all? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [39] -------------------------------------------------------------------------------- Yes. It's a very interesting question. First of all, I'd say none of our branches are open. So it's -- I can tell you that we're very proud of our remote workforce. We moved what, we have 1,440 employees, we moved everybody to a work from home, to a work from home situation back in March, and we feel the company has been very productive and very successful. And it was always in our 5-year strategic plan to move away from brick-and-mortar, especially with our per diem business. And during the COVID crisis, it gave us an opportunity to accelerate that plan because our teams were working so well and we've outfitted everybody with the proper technology to ensure that they could work from wherever they were at. But we think we manage -- we're a very metric-driven company, and the metrics are very positive in terms of people's activity. In fact, it's almost -- you probably heard this from other companies, too, it's -- we spend a lot more time on human resource issues in terms of helping our workforce not get burned out either because we find people working very, very hard in a work from home situation. So to answer your question, no, I don't think that has had any impact. And I think we're looking forward to, at some point, being a much leaner organization in the buildings. We're going to finish this year around 19 offices. When I joined the company in January 2019, we had about 65 to 70 offices and we now have 19. So it's a big advantage for us to move without that overhead in the future. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [40] -------------------------------------------------------------------------------- Okay. And then maybe just last question. You talked about one of your companies in-sourcing. I mean can you talk a little bit about why that actually happened? And then whether that's something that you think is just a one-off or are there's any issues that you kind of see around in-sourcing trends? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [41] -------------------------------------------------------------------------------- I'm not sure I understand your question, sorry. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [42] -------------------------------------------------------------------------------- I thought that you said that you have one client who insourced during the quarter, was that right? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [43] -------------------------------------------------------------------------------- Right. Yes. Yes, that's -- yes, good question. So what we have seen in this marketplace, in those pockets and geographies where hospital volumes have declined, they need agency and contingent labor in a much lower volume than they did, of course, pre-COVID. So we've seen a few select clients in those markets where their volumes are down, pull in and insource certain parts of their human capital outsourced program that they had with us. In this particular case, it was a client that we provided a number of patient care technologists which are like an hourly worker that helps especially long-term care and chronically ill patients. And that was an operation that they felt they could manage themselves more economically and efficiently, so they took it in-house. -------------------------------------------------------------------------------- Kevin Mark Fischbeck, BofA Merrill Lynch, Research Division - MD in Equity Research [44] -------------------------------------------------------------------------------- Okay. So that sounds like more of a one-off thing and it's not something that you're having conversations with broadly? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [45] -------------------------------------------------------------------------------- Yes. That's right. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Our next question comes from Tobey Sommer with Truist Securities. -------------------------------------------------------------------------------- Tobey O'Brien Sommer, Truist Securities, Inc., Research Division - MD [47] -------------------------------------------------------------------------------- I was wondering if you could comment on the labor dynamics as you're seeing it related to COVID in the full-time nurse staff at your hospitals. And then maybe in that context, beyond what you can see in your sort of numbers and orders over the horizon, what does your experience tell you about the trend in pricing as a result of some of those labor market dynamics? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [48] -------------------------------------------------------------------------------- Yes, it's a good question. I think, look, first of all, I think in a lot of ways, hospitals through this pandemic have embraced the temporary staffing model in a much bigger way as a result of these spike in surges. I think these hospitals recognize that the effort on a local basis or regional basis to staff all their needs is somewhat insurmountable in a pandemic. So this industry at moment for a company like Cross Country, we think sets up very well as one of the larger players. We're more important to our large clients than ever before to become their partner to help them solve these critical shortages. And part of that is if you look at the data around kind of the segment in health care staffing around search and direct hire, direct hire or those firms that help, for example, hospitals find permanent staffing, their orders are way down, the business is way down. And we have a Search business that we can see that ourselves. And so I think in a lot of ways, what happens to the health care staffing industry, it becomes more important as a result of the pandemic, especially companies like Cross Country in terms of our ability to provide a one source or a total talent solution to our clients, and we can bring our temp staffing as well as our direct hire business, our RPO business and advisory services to their doorstep. And help them, through our MSP programs, manage a supplier channel in a very efficient way. So that's kind of what we're seeing and feeling about the results of this moment in the industry. And then in terms of pricing, I think that we're seeing, as the broad market improves, as we've called out, we're seeing some moderation in our overall pricing. And we're certainly seeing the pricing for COVID-related supply lower than what we saw in the second quarter. But I think we're going to ride the roller coaster, and we don't have a crystal ball in terms of where that's going. But -- so I mean, that's where I think. I think in a way, I think health care staffing is projected to grow next year 4%, 5%. And I wouldn't be surprised if it grows more than that. So that was kind of a general answer. I don't know, Buffy, if you want to add something to that for Toby? -------------------------------------------------------------------------------- Buffy Stultz White, Cross Country Healthcare, Inc. - President of Workforce Solutions & Services [49] -------------------------------------------------------------------------------- No. I think the only thing I was going to add is we are, to Kevin's point, seeing more adoption into contingent use. Even though after the first COVID surge, there were a lot of cost pressures and identifying line items that health care facilities can impact from a cost perspective, they recognized the flexibility that they gain through contingent staffing. Now that being said, they're all looking at core staff and how they can uplift those numbers and bring back core staff that maybe they've had impact through the first COVID surge as well. One of the areas is total talent management, being able to offer them whole house of contingent staffing as well as direct staffing. And then in between, offering them the conversion strategy of you have a talent pool here of contingent resources, you can transition them into full-time resources on your core staff. So that's starting to bolster their hiring in addition to our Search business. -------------------------------------------------------------------------------- Tobey O'Brien Sommer, Truist Securities, Inc., Research Division - MD [50] -------------------------------------------------------------------------------- That makes sense. Can I get your perspective on the MSP markets and your experience and what you're hearing from your largest customers? And maybe specifically within that, a comment on the market share trends you're seeing from staffing led MSPs versus vendor-neutral setups? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [51] -------------------------------------------------------------------------------- Yes. Well, I mean, look, we -- in terms of our MSPS, it's been a good year for us. Our spend under management is down slightly from Q2, where we had a big spike in the markets that had the initial COVID surge. Our capture rate is essentially the same year-to-date, about 65%. And I'd say that we still have, we're still onboarding from our pipeline recent wins. We have about $45 million to $50 million that has yet to come onboard. But I think the question that you're asking is, how is a primary supplier model holding up versus say a vendor-neutral model? And my perspective, and I think Buffy and others would agree with this, is that we're more important now to these hospital systems. They need to have a partner that knows them, that can be there to handhold the various spikes in the units that they need. I mean MSPs, a lot of people don't understand about MSPs versus a vendor-neutral tech platform, MSPs come with, at least our variety here at Cross Country, with a significant commitment investment in terms of program management onsite. So we have full-time employees at many of our MSPs that work in the hospital or on the grounds or adjacent to it. And they're in the meetings of our clients on a daily basis, ensuring that we can help resolve their issues. I'd also say that, again, another comment about Cross Country, having scale and being one of the larger players, we have a terrific supplier panel. We vet hundreds of suppliers. We're very pro-competitive. But we have a very strong group of suppliers over a long period of time that we have been able to measure their quality and bring that to the doorstep of our clients. So we feel very passionately about the MSP model. I think some systems from time to time will adopt the vendor neutral model, and then they will come back to an MSP model. And there is always that type of movement. And I don't know, Buffy, if you wanted to add to that. -------------------------------------------------------------------------------- Buffy Stultz White, Cross Country Healthcare, Inc. - President of Workforce Solutions & Services [52] -------------------------------------------------------------------------------- No, I agree with all of that. I mean I think we definitely have strong capture, but we rely very heavily on our strategic supplier partners. I think the other avenue of having a staffing firm as the MSP that truly excels in the MSP space is, we also have direct lines to supply unlike some of the vendor management solutions that you'll see. And we can offer those insights and true market demand and supply insights to our customers because we're closer to it. We live it and we work with the supply panel, but we live it through our divisions. I think the other thing is the clinical expertise, really, and we partner with the health care facilities to truly manage the outcomes through the actual supply and how the supply can contribute to it. So I think by being a part of the supply world in addition to MSP world is a differentiator for them. -------------------------------------------------------------------------------- Tobey O'Brien Sommer, Truist Securities, Inc., Research Division - MD [53] -------------------------------------------------------------------------------- Last question for me is maybe to get you to comment on your physical footprint reduction in the IT kind of unification and upgrade that you're undertaking. Kevin, do you think that you could have kind of hit the long-term margin goal of the company without these efforts? Or are these -- are these 2 initiatives kind of integral on a scale 1 to 10, are these a 10 must do to kind of get to an 8% EBITDA margin over time? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [54] -------------------------------------------------------------------------------- Yes. Bill and I may have different opinions on this, but I would say, yes, definitely a 10. And I'm very proud of the fact that we've -- our digital transformation, our infrastructure upgrade, we put together a 3-year plan. We are exactly where we wanted to be at this point in time. We just rolled out to the biggest division in our company our new ATS. It's been in place for 5 weeks and the recruiters love it. I'll let Buffy comment in a minute about what the team is feeling about this new technology. But to your question, creating a unified tech stack in the company and having an efficient and automated way to manage our business and creating a wonderful candidate experience through our marketplace technology, which is the first proprietary technology the company has launched in 25 years, is really important to, number one, making sure all of our employees have the productivity tools they need to manage their businesses faster, more efficiently. We like to think about we get job orders from our clients, and there's like a basketball shot clock. It's ticking, and we need to fill those orders as quickly as possible because patient care is at stake. So having good tools for our recruiters and our account managers and all of our revenue-producing employees is a material assistance to get to this 8%, which we've reaffirmed. We feel confident. The last couple of quarters, you can see greater profitability coming from Cross Country, that we're on a successful path, and we feel confident we can get there in 2 years. And so we're not done. We have a lot more technology to bring into the enterprise over the next year and a half. In particular, we're going to be automating our per diem business next year in terms of the tools our employees are using. We're already automating the candidate experience and the customer experience through an interface there. And then beyond that, we are moving, as I mentioned in my earnings comments, to automate our middle office and creating a single unified tech stack is very important to us. But I don't know, Buffy, if you want to maybe give some insight because we're quite excited about our improvements. -------------------------------------------------------------------------------- Buffy Stultz White, Cross Country Healthcare, Inc. - President of Workforce Solutions & Services [55] -------------------------------------------------------------------------------- Yes, very excited and very, very proud of our organization. This was a major change for us, and we've had incredibly strong adoption. Certainly, we had a very well-executed change management plan. But I'm very pleased with the production levels within only the very first few short weeks that we've been live on new systems. And I think that it certainly helps in processing faster. It improves, ultimately really, because it improves productivity and processing and gives the control to the recruiters, it's improved our culture. And overall, it makes the work more enjoyable for our recruiters, frankly. So it helps with the efficiencies. But then our recruiters now can really focus on what's really important as well as the candidate experience and helping them with their career aspirations, walking them through what the work environment will be like, giving them support through their onboarding process and 24/7 access and support through clinical services. So I think that we've seen great adoption, and I think it's only excelling from there, and we're already heading on to our next phase. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Our next question comes from Brian Tanquilut with Jefferies. -------------------------------------------------------------------------------- Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [57] -------------------------------------------------------------------------------- Just a question again on the guidance. Obviously, COVID demand is strong across the board. And I get the moving parts with the onetime labor disruption placement in Q3. But is the revenue guide, the sequential increase to the midpoint of about $4 million, is that just conservatism at this point and lack of visibility into recruitment? Or is there anything else we should be thinking about? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [58] -------------------------------------------------------------------------------- Bill, you want to take that? -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [59] -------------------------------------------------------------------------------- Yes, sure. I'd say I don't think the guidance is set to be conservative. I mean, obviously, we strive to set guidance that we believe we can meet or exceed. But I think at this point, as we talked, we called out a lot of the issues that we're seeing coming into the fourth quarter. The sequential step back from the labor disruption, the impact of the holidays as we get into the end of the fourth quarter starts to impact our branch business in particular as well as our travel business. So starts begin to push out from December starts into January starts, so you don't get as many starts in the last couple of weeks of the year. So there's those impacts into it. And as I think about just the sequential nature of the business, locums obviously has a normal seasonal downtrend from Q3 to Q4. And given I'll say, the weak, very weak demand that we're experiencing, we're not expecting to buck that trend going into the fourth quarter. So yes, I mean, we're not looking at this as an EDP guidance target, but I think it's something that we certainly feel our confidence in meeting or doing our best to beat it, of course. But I would not say it's something to be viewed as ultra conservative guidance. -------------------------------------------------------------------------------- Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [60] -------------------------------------------------------------------------------- I appreciate that. And then just on the gross margin guidance. I guess as I think about the onetime labor disruption placement revenue from Q3, if you don't mind just sharing with us kind of like what margin profile that has? And how are you thinking about the sequential margin being flat given the margin profile of that sort of onetime revenue recognized during the quarter? -------------------------------------------------------------------------------- William J. Burns, Cross Country Healthcare, Inc. - Executive VP, CFO & Principal Accounting Officer [61] -------------------------------------------------------------------------------- Yes. I mean it's not -- again, it's $8 million in revenue, so the margin wasn't all that much higher than our normal business. So it's not, I called it out, it was a 25-basis point improvement to the margin for the quarter overall, just when you look at it with and without the impact on the labor disruption. So as we move into now fourth quarter, I think we're seeing favorable trends in certain of our cost items that run through cost of goods sold, whether it's health insurance and the like, workers' comp. There are some areas that have been trending more favorably of late. Earlier in the year, we had a higher percentage of folks that had to go on quarantine or that might have been on assignment that we have to continue to have payroll costs for. So we're seeing some favorable experience, and that's kind of offsetting some of the impact of the loss from the labor disruption that we'll experience going into fourth quarter. And then the last piece I'll leave you with is the education business. As it does ramp back up, and it will not be up to full year-over-year level of performance, it will still be down double digits, but it will be considerably more revenue in the fourth quarter. And that typically has a gross margin higher than the average of closer to 30%. So there's an element of mix as well. -------------------------------------------------------------------------------- Brian Gil Tanquilut, Jefferies LLC, Research Division - Senior Equity/Stock Analyst [62] -------------------------------------------------------------------------------- That makes sense. And then, Kevin, I guess, last question for me, on the physician staffing side, as I think about ED or ER docs and anesthesiologists facing 8% to 9% rate cuts next year, and also, obviously ERs are still trending significantly below pre-COVID levels. What are the conversations like with the hospitals in terms of staffing levels and then the rates that they're thinking about given the rate headwind that they're seeing into next year? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [63] -------------------------------------------------------------------------------- Yes. Well, I'll start that, and I'll let Steve answer as well. Look, the conversations are fill rates are down, demand is down due to the softness in the market. Specifically, right now there are spikes around physicians for emergency management in some of these key areas. So it's also very spotty in terms of where the biggest needs are. As I mentioned earlier, that's the one specialty that we're seeing is up year-over-year of our biggest 4 specialties. But look, the hospitals have had a challenging year. There's a lot of financial stress in the marketplace. One of the things that we did back in March when COVID hit, we were very careful to publicly and then with our clients state that we're here as your consultant, your partner. We're here to help you provide the health care professionals that you need at the bedside to take care of your patients and to take care of these sick Americans. And so we've done everything we can through this COVID experience to kind of be a good partner with our customers and make sure that we're being sensitive to their financial constraints. But Steve, you might want to add to that, to Brian's question. -------------------------------------------------------------------------------- Stephen Alexis Saville, Cross Country Healthcare, Inc. - EVP of Operations [64] -------------------------------------------------------------------------------- Thanks, Kevin. Hi, Brian. The only thing I'd really like to add is we've faced cost pressures in all segments of physician staffing over the years as CMS has reevaluated what the measure of payment might look like for particular services. Ultimately, as Kevin was speaking about, we are a consultative partner with all of our clients. We look to provide solutions that meet their financial, operating and clinical requirements, and we do so with their best intention and our ability to meet that intention in mind. And so while we recognize that there are continuing headwinds that could affect demand in those categories, we also recognize that those tend to resolve themselves as the hospitals begin to work through the payment system, and we begin to provide -- continue to provide services through that. -------------------------------------------------------------------------------- Operator [65] -------------------------------------------------------------------------------- Our final question comes from Kevin Steinke with Barrington Research. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [66] -------------------------------------------------------------------------------- You had mentioned investment in revenue producers, I believe in the fourth quarter. Can you just maybe characterize that in terms of the magnitude in terms of either no cost or headcount? Yes. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [67] -------------------------------------------------------------------------------- Well, we don't typically want to disclose how many recruiters or revenue-producing employees that we have. But I will say that we, given the order flow, given our ability to aggregate supply, one of our constraints is our own number of revenue-producing employees, in particular recruiters. So we look for opportunistic hiring. One of the opportunities we have as a business today is, we think beyond branches and buildings and brick-and-mortar, so we're more creative in terms of looking for talent. But what we're finding is that a lot of talent seeks us out now. Given our turnaround, given the digital transformation, given the momentum that we have in the marketplace with our customers, reputationally, I'm very proud of Cross Country and how we stand within and amongst our peers. So we actually have a steady flow of candidates of people that are experienced that want to come work at our business as well. But we're, as we said in our comments, we are determined to be a growth company in all lines of business. And before the pandemic hit, we were growing in all lines of business for the first time in several years. And we think the opportunity is to get that growth moving across all segments, and we're going to continue to invest in the human capital side of that. -------------------------------------------------------------------------------- Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [68] -------------------------------------------------------------------------------- Okay. And then lastly, I was just curious how much of the revenue headwind in education have you been able to offset with your teleservices offering? -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [69] -------------------------------------------------------------------------------- Yes. Yes, it's a great question. I can tell you that it is -- and by the way, when I answered the question before around our digital transformation, we talk about our new ATF and our infrastructure a lot, and we talk about our marketplace app. But the other thing that we did in 2020 was launch the company's first teleservices effort in our education business. And our approach has been to partner with the very best telehealth or tele-delivery companies in the marketplace, and we've signed multiple partnerships, and we're very encouraged by that. One of our vendors has helped us on the education front, and it's been a key driver. I mean I think without our teleservice around our Cross Country education business, where we provide virtual school nurses and other health care but also education professionals, our numbers would be off a lot worse than 30%. One final point I'll make is we're very excited about telehealth. I mean it's up 1,000%, it's changing the way health care is delivered in this country. And telehealth enables Cross Country Healthcare to do what we do best, and that's supply clinicians. So we are embracing telehealth as a huge opportunity for our company and really our industry. -------------------------------------------------------------------------------- Operator [70] -------------------------------------------------------------------------------- Thank you. Ladies and gentlemen, this does conclude the question-and-answer period. I'll now turn it back over to Kevin Clark for closing remarks. -------------------------------------------------------------------------------- Kevin Cronin Clark, Cross Country Healthcare, Inc. - Co-Founder, President, CEO & Director [71] -------------------------------------------------------------------------------- Yes. Well, thank you, everybody. We look forward to updating with our progress through the rest of the year in the next quarter. And we hope everybody stays safe and healthy out there. Thank you for joining us tonight. -------------------------------------------------------------------------------- Operator [72] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.